CIO Market Update Audiocast Series​

Chris Hyzy:                Okay. Thanks, everyone, for joining this week's Street Talk Call. As we head into June, there’s obviously a lot to go through. Much has happened and still very little has happened as it relates to the last three plus months of this year overall if you think about the markets, but we're about to head into the part of the market cycle here where liquidity once again means everything. I want to unpack that. There's two parts to this call. The first part is a look inside. A look inside to market internals, a look inside to economic internals to give us a real feel for what's really going on and then we'll go through that in successive calls over the course of the next few months to get us ready for what we believe will be a very, very different next 9 - 12 months than what we have gone through in the last six months or so. Then secondarily and more importantly, we're going to talk to Jim Carlisle, Senior Executive in our Washington policy team that's been following the event very closely and is very much on top of what's going on with the latest debt ceiling debate negotiations and the state of the state there. Now that the house has passed the package that was agreed to by Speaker McCarthy and President Biden, what's next? So, we'll go through that in just a moment.

                                    First and foremost, the market internals – a look inside. What is interesting recently if you look at the last three months, and this is a study done by Absolute Strategy Research out of London, the typical stock has lagged the market by 9% over the last three months. Now, that’s evidenced when you take a look at the MSCI US cap weighted index versus the equal weighted index. In the last three months if you look at the US market cap weighted index, it’s up about 6%. Obviously, up a little bit more than that year to date but just looking at the last three months, it's up about 6% dominated clearly by the mega cap technology arena, but the typical stock is actually down about 3% and that 9% gap, if you take that collectively over the course of history, the market right now has the highest concentration since 1932. So, in the last 90 years the widest gap that we're seeing right now has only happened one other time as it relates to this wide, and that was some 90 years ago. Now, there have been other type of market cycles that have produced extreme narrow breadth and overall wide gaps between the average stock and the highest of market cap stocks and we've seen those both in bear market cycles and bull market cycles. So I always say this because the data that has been discussed very loudly in the last few weeks in terms of the overall market breadth and what does it tell us, it really doesn't tell us much. We've seen this before in different market cycles, both good ones and bad ones. What it does tell us however though is what is the rest of the market going to do as it relates to the underlying data and whether or not the rest of the market that is not leading and not gaining momentum - are there signs within that part of the overall market in addition to the highest market cap weighted areas - can they both work together in the next 12 months? That is where we're going to take the cue from liquidity. So first and foremost, very, very, very poor breadth/narrow breadth, however you want to put it. Wide gap between the average stock and the highest outperforming stocks. Only one other time this wide and at least in data by Absolute Strategy Research and that was back in 1932, but we caution people using this data to suggest that there's an underlying trend here. What we have seen over the course of bear and bull market cycles that this can happen in either. Now having said all that, clearly market direction is highly correlated to the point where it's almost 90% correlated to what bank reserves are doing. We've long talked about this. When bank reserves go down exceedingly or go up significantly, that has a positive effect. If they go down, that's a negative effect overall on the market on a month-to-month basis overall. The reason is because that has a big effect on the money supply. If the money supply is expanding, there's great liquidity out there. If there's great liquidity out there, it tends to increase flows overall and risk assets and then it tends to support the market. In 2022 we estimate that some $600 billion came down in terms of overall reserves and the market was down over 20%. When you take a look at this year, bank reserves’ up about $300 billion our last estimate and the market is up over 8% - 9% overall, so there's a strong correlation. We'll continue to watch this. Most importantly, and this brings us to the second part of the call in just a moment that Jim's going to discuss, which is after the debt ceiling hopefully gets signed, and all points of interest are pointing that way and expanded I should say, that the Treasury general account - we've talked about this before - needs to expand again. It needs to go from this very low levels which are almost close to zero give or take in the next few days. It needs to go back up quite a bit. Some estimates say $500 billion - $600 billion or more. If that's the case, that means bank reserves will likely come down in addition to what the Federal Reserve is doing with quantitative tightening. If the Federal Reserve goes too far or goes well above that and continues to induce quantitative tightening at the same time that bank reserves are going down, there's a strong likelihood that liquidity comes out of the market, and that's where a defensive tone is the appropriate emphasis. So, we'll watch all of this. Now if we know this, it is our hope that the Federal Reserve knows this and therefore it could be the case that the Federal Reserve takes their foot off the quantitative tightening pedal and begins to so-called taper. In other words, lessens the impact of removing liquidity from the market while bank reserves are going up because the treasury general account is being so-called reliquified. So, all of that, what does this really mean? It means we're going to continue to watch two very, very important items. Number one, what is happening with bank reserves and overall liquidity/money supply? That is absolutely paramount. It remains paramount in our opinion. Number two, as it relates to what's going on with market internals driven what we have seen by significant earnings momentum either way as it relates to sector performance, we're going to need to watch margins and pricing power very closely and here's why. There are two sides to GDP. The first side is the demand side, spending. The second is income side. The spending is up over 1% in the first quarter if you take a look at the numbers. The income side is actually down considerably again in the first quarter. If you average those two together, you'll see that over the last two out of four quarters that GDP is actually down when you actually dig through the numbers. So, are we in a so-called mild recession already? Some may call it that. Our opinion is a little different in the CIO office. It’s about earnings recession and that's what we're noticing. Although earnings have had strong momentum or a little bit better coming out of the first quarter, what we're noticing is that its mostly pricing power backed up by inflation. Even though inflation has come down, there's still some pricing power that's feeding into overall better than expected so-called revenues and the bottom line. So nominal GDP is up. Productivity is poor. The market believes that this is going to change for the better in the coming few months, if not the coming year. We are a little bit skeptical about that because we're continuing to see that earnings are driven by the pricing power and not necessarily underlying fundamentals at this point. The income side has been down while the demand side was up. We need to watch pricing power and margins very closely to give us a feel for whether or not we're past the so-called tough part of the economy now that the Federal Reserve has paused and we also most importantly in the short term need to watch bank reserves and liquidity.

                                    The final part for the upfront comments as it relates to market internals is equities are telling us slightly different stories. The non-US part of the equity spectrum had outperformed considerably the US to begin the year and the closeout last year. Europe has been a major weak partner in the last few weeks and they have wiped away a good portion of their outperformance and now neck and neck with the United States. This is one of the cautionary tones we've discussed earlier in the year that in order for Europe to continue to outperform, they're going to need stronger economic fundamentals, they're going to need a cyclical rebound as value based rebound, and obviously with negative mega cap tech taking the baton and outperforming handsomely, that has underpinned the US relative to Europe recently, but Japan is holding its own. So, Japan continues to outperform. Now with the dollar getting a little stronger here given all the concerns about the debt ceiling as well as overall Fed pause and ultimately flight to quality, we could see the non-US side of the equation begin to levitate relative to the US. Obviously, US technology sector has underpinned the US overall.

                                    Fixed income. All the action’s been on rates. All the action’s in the treasury market. Investment grade credit still relatively tight at 137 basis points. Three basis points tighter on the month. It's not cheap but not rich. High yield a little rich at this point. Actually expensive. Munis to treasuries have backed up about 7% points and now munis, which was driven by low supply, they're very richness at the beginning of the year below the seven year level was driven by a very low supply arena. Now that supply’s starting to increase a little bit, so you're starting to see better balance between munis and treasuries and mortgage-backed securities are getting tighter. Overall, on the duration front we continue to believe that it is okay to extend duration here given our view that 10-year yields are likely to head lower by the end of the year, but at the end at the end of the day given where the front end of the curve is giving you in terms of cash flow, it's okay to wait. So just depends on your overall risk and portfolio positioning.

                                    Last but not least, we believe it is important to stay defensive through this. We're seeing some deterioration in the underlying data, both at the asset allocation level stay defensive, the equity versus fixed income level, and then within each and that means a higher quality bent within equities and fixed income overall. If your individual securities characteristics, if you’re looking for that - continue to maintain balance between growth and value as well as overall emphasis on high free cash flow areas. Sectors overall is a mixed bag. There’s some interesting data coming out of the industrials in which margins are very wide and actually getting wider yet healthcare showing very narrow margins. We don't make much of this story at this point because it's really dependent upon different strata of those sectors and we'll continue to watch that. We continue to focus on sectors and not necessarily overall sector emphasis.

                                    Finally, most importantly now, let's switch over to the most important part of what we're all witnessing and going through and about to see a closure to hopefully which is the debt ceiling negotiations now that the house has passed the package that was agreed to by Speaker McCarthy and President Biden. We have a great guest today, Jim Carlisle, Senior Executive in our Washington policy team, to go through that. So, I'm going to start off quickly, Jim, with what we always do when we look at very important topics like this, is take us through what's next. What’s the state of the state, Jim?

Jim Carlisle:              All right. Great. Thanks, Chris. So, with house passage last night, the debt ceiling bill goes to the senate. It's pretty clear that it has the votes to pass. The plan is to start considering amendments today. We've got at least a dozen senators who have expressed interest in offering amendments. We don't think any are going to pass. There probably will be an agreement to require/make sure that there is a 60 vote threshold to pass any amendment and if an amendment did pass, the bill would have to go back to the house. The house has left and then we'd be in a little bit of trouble. So, these are going to be sort of theater amendments and it remains to be seen how many amendments senators demand votes on. The hope – what Majority Leader Schumer is trying to put together is a unanimous consent agreement to limit the number of amendments, have time limits for consideration of each amendment, and do that in such a way that allows for a final vote by no later than some time tomorrow. We’ve done some soundings with the republican offices including the leadership and we're not hearing any surprises. I think everyone understands what the end result is here and so the hope is that by sometime tomorrow the senate votes and passes the bill and sent it to the president. There is some sliver of hope that the senate can get it done late tonight, but what we're hearing more consistently is some time tomorrow. Now, I'll give you the worst case scenario, Chris, which is they don't get a unanimous consent agreement. One or more senators decide they're going to ride the clock out. It would take potentially up to two cloture votes in the senate to move the bill through the senate if we get folks who don't want to cooperate. If that's the case, it could be a real challenge to get the bill done by close of business on Sunday. So, there's at least a theoretical possibility that the senate would not be able to complete action by the beginning of June 5^th, which has been identified by Treasury is a likely X date, but that is not the base case right now and everything we're hearing right now is optimism that this gets done no later than tomorrow.

Chris Hyzy:                So, Jim, like a lot of these negotiations we've seen in the past whether it's back in ‘13, 2011, some might even say even though it didn't really occur in ’18- ‘19 but there's a lot of jawboning going back and forth between both parties about which party can claim victory. Right now, the republicans are highlighting some reduced Federal spending. The democrats are saying that they had spared most domestic programs from significant cuts. What does this say where we are about the tales of both parties which everyone was worried about going into these negotiations?

Jim Carlisle:              Yeah. So, you start with the parties being pretty diametrically opposed and the republicans saying they are not prepared to pass a clean debt ceiling bill. They want to extract some discipline on the spending side. In exchange, republicans passed an expansive bill in April that would have cut close to $5 trillion off of the debt in the next 10 years and then the mantra at the White House and Senator Schumer was, “Let's get real and just pass a clean debt limit increase,” and one thing that was sort of interesting to me is how that changed pretty quickly. It changed for a couple of reasons. It changed because I think there was real skepticism that McCarthy couldn't even get a bill through the house given sort of the different factions within the republican party and the house. He did something really smart, and that was after the 15 votes that it took to elect him speaker, he started the very next day sending his trusted lieutenants out to have listening sessions with house republican members to start talking about the debt ceiling, what they wanted in exchange for a debt ceiling and what some of their pressure points were and that really I think bore fruit. I think anyone would have predicted that McCarthy, who has pretty limited experience working on major legislation, I don't think anyone would have predicted that he could have gotten two-thirds of the republican party in the house to vote for a debt ceiling bill which is essentially anathema to the party. He did that and it was a long sort of calculated campaign. We saw the White House and Schumer kind of flip pretty quickly. Once the house passed its bill, it became clear that a clean bill was going to be a no go in the senate and then some of the polling numbers I think where the public showed itself to be fairly supportive of doing something on spending in connection with the debt ceiling. Yeah, that sort of encouraged I think a negotiation. So, we went from no talks to intensive talks really quickly and I think the White house did a good job of putting sort of seasoned professionals on its negotiating team. McCarthy put a couple of his trusted lieutenants in the position of negotiating a bill and we got a deal that's sort of like the old fashioned, “No one really totally loves it, but it's going to get a likely runaway support.” So, I think it was sort of good for the state of the body politic and McCarthy and Biden had never really done anything, negotiated anything, know each other well and I think it bodes well for when we have a future sort of serious budget related discussions whether it's government funding that they've got. At least they're one for one on knocking out a deal when it was crunch time and we had to get a deal.

Chris Hyzy:                Right. So, taking a step back and given our size and your team’s commitment there in Washington and what you're seeing and hearing and knowing full well what is going on in the past, is there anything that we can glean from these negotiations at this point that can be extended forward in terms of either the race for ‘24 or just the overall partisanship, if you will, between the two parties and what they need to work on in the next 12 months or so?

Jim Carlisle:              Yeah. So, I think the thing that maybe surprised me most in the bill is that both parties viewed it in their interest to push the next X date beyond the November 2024 elections. So, the debt ceiling and the bill is technically suspended through January 1, 2025 and then at that point we assume extraordinary measures would reset. So maybe some time in the first quarter of 2025 congress is going to have to deal with this again. There have been some voices saying - the republican bill that was passed in April would have only been a one year effective suspension of the debt limit and would have put this issue back before congress in advance of the November elections. Having done this, it sort of clears the decks. At least we're not going to have to deal with the debt ceiling again before the election, but by putting caps on discretionary spending for the next two years, it also should take a little bit of the drama out of the annual tour of writing 12 appropriations bills. So, it's not clear between now and November what is going to be a difficult spending or budget related negotiation between the White House and republicans and between democrats and republicans on the hill. So, I think the expectations around what the two parties are going to be able to agree to or must agree to legislatively, there's not a whole lot of the people are pointing to that you can say really has to get it done beyond just keeping the lights on.

Chris Hyzy:                That seems like the art of negotiation is always both sides can claim victory in whatever negotiation there is, but yet tend to be unhappy with the full conclusion. It seems to be following suit again. Last question for you, Jim, is going to be when we take a look at what's in the actual bill - ultimate passage hopefully - there isn't a lot of talk about a major fiscal drag as it relates to either cap on spending or what it can do to overall government spending and its effect on the economy. Do you see it that way? Is that something that's in line with what you and the team see?

Jim Carlisle:              Yeah. If you look at these spending caps, you've seen the two parties describe them different ways. I look at it as holding fiscal ‘24 spending, discretionary spending, just slightly below fiscal 2023 spending. Republicans really wanted to take it back to 2022 levels. So, they kind of met in the middle there but these are not huge numbers in the grand scheme of things. The rescission of unobligated Covid funding, that's $28 billion. So, there's not a whole lot of sort of big - you have a multi-hundred billion dollar numbers involved in this deal. Certainly, the republican bill passed in April. That was the case. Here, you kind of checked a lot of the boxes that were in the republican April deal, but you just did at fairly non-fiscally damaging amounts if you're thinking about fiscal flows of funds. So, I think it's a win for Kevin McCarthy in getting a bill across the finish line that again, checked a lot of the boxes that he wanted to check, but if you talk to the House Freedom Caucus and conservative republicans, they’re like, “This didn't make a dent in spending at least as far as we see it.”

Chris Hyzy:                Got it. Got it. Well Jim, I think that'll do it for the upfront comments for today. I appreciate all the comments. Just overall from a market perspective, economic perspective, a policy perspective, it seems like the story is playing out as expected. Markets have been narrowed. They've been waiting. It seems like investors are frozen. The economy is showing mixed signals between the job market and what's going on overall with spending and then that with the inflation trends, we still see inflation coming down. Not a lot of fiscal response. Not a lot of fiscal drag. Fiscal response in the next few years will likely be very limited. Monetary response likely limited. So, we've got to go back to economic fundamentals like productivity, earnings momentum, and overall corporate fundamentals to drive our asset allocation thoughts and viewpoints. So, with that, that’ll close our upfront comments for today. Thanks for listening.

Operator:                   Please see important disclosures provided on this page.

END

Marci McGregor:     This is Marci McGregor, Head of Portfolio Strategy for the Chief Investment Office and today is Tuesday, May 30^th and here's today's market update. The S&P 500 closed higher last week and above the psychological level of 4200. Now, this is the highest level that we've seen in the S&P since last August but look under the hood of this market will tell you that we have a market that's very concentrated and the top 10 weightings in the S&P are actually responsible for all of the gains we've seen in the index year to date. If you look back, markets tend to be very concentrated in up years for the index, but so far, the magnitude of this concentration actually remains an outlier relative to history. Generally, we want to see market participation and participation in this rally broaden out because that would be a signal of a healthier market overall. This week and today markets have continued to rally on news that there is a deal in Washington to raise the debt ceiling. Over the next week we do expect this agreement to be passed in both the house and the senate. The key takeaways on the debt ceiling agreement are that the ceiling would be increased through January 1, 2025, so past the next presidential election. There were only modest cuts to spending, particularly to non-defense government spending, and an end to student loan forbearance. Going forward, the spending cuts will amount to a modest drag on the economy, so all eyes are going to shift to the private sector to see if they can offset this drag to growth. So, what does all of this mean for the market? Once the bill has passed, the Treasury will then need to restock their general account. Now, the Treasury has been actually spending down their general account since the debt ceiling was technically reached back in January. Now, they will re-fi this general account by issuing debt which in turn will effectively remove liquidity from the market. If you look back at the last time this happened, what you saw in the weeks following was some weakness overall in equities and you actually saw a rotation where value started to outperform growth. So, while a significant risk is removed with an agreement to raise the debt ceiling, this may not be an all-clear signal for markets, but for investors with a longer time horizon, even like two to three years, any volatility that we see in markets in the coming weeks and months may present an opportunity for investors looking to put cash to work. When we look at the week ahead, there's a lot of economic data ahead of us. Non-farm payrolls and ISM manufacturing data will be in focus. Expectations are that the manufacturing sector will continue to slow and on the labor market side, payrolls are expected to slow as well, but still remains strong enough to outpace normal growth in the labor force. As we've discussed before, the labor market and in turn the US consumer have been two of the most resilient parts of the US economy so we'll be watching them closely. So, what does all of this mean for the Fed and their plans for interest rate policy? Well, when we look ahead to the June meeting, the question we have to ask - is this a meeting where the Fed will pause the rate hiking policy or could they potentially just skip the month of June while they watch data closely? Now, market expectations have changed recently and now the market is looking for one more rate hike between now and the end of July, but the market has also pushed out their prospects for a Fed cut to later in the year. This is something we were watching closely because the idea that the Fed was going to pivot sharply to cut was not something that we agreed with. Bank of America Global Research Economist, Michael Gapen, looks at three factors that will determine the Fed’s path in the very near term. The first and likely most important will be labor market data like we'll get this coming week and inflation data. If both of these are strong, we could expect that the Fed could hike interest rates again. The second major factor of course is the debt ceiling. Now that we have a deal, at least in principle, this removes a lot of uncertainty that could have kept the Fed on hold. Then the third factor that we think will determine the Fed's path is the path of regional bank stress. Now, recently we have seen stability on this front, but the impact of credit tightening remains I would argue one of the biggest unknowns for this stage of the economic cycle. The Fed may want to see more information on loan growth before they commit to another interest rate hike. Before the July meeting they will have their next data from the senior loan officer survey so we'll be able to digest that before making a rate decision. So, what does all of this mean for investors? Well, the chief investment office would argue that this is the time to stay the course and be really disciplined. The agreement on the debt ceiling, the general slowing in economic activity that we've seen has largely been in line with our expectations. We remain neutral in terms of portfolio positioning when you think about that stocks, bonds, cash allocation and we continue to prefer up in quality positioning across the board. We remain nimble as we watch the signals on the future path of the economy and for markets to guide us when we think about positioning. That'll do it today. Thanks so much for joining us.

Operator:                   Please see important disclosures provided on this page.

END

Joe Quinlan:              Good morning, everyone. This is the market update for May 25^th. A lot to cover today. Obviously, a lot of issues down in DC. We're finishing up earnings season. There's a lot of talk about US recession. So, I do have, for the Q&A session for our call today, Chris Gunster, who's going to do a deeper dive on fixed income, [Ehwario Efeyini] who’s going to talk about the US markets outside the United States, non-US markets - emerging markets, developed markets. I'm going to start with just kind of a data check here. I always like to start like where are we? We're almost five months into the year. The S&P as of close yesterday up 7.9% total return, the Dow basically flat, and then we got the high-flying Nasdaq up around 19.7%; even higher today based on some specific company news. As everyone knows, it's the narrow breadth driving the Nasdaq and the S&P and one of the key questions for the second half of this year will be, “How much breadth will be added to this market rally that we've seen thus far?” Overseas the emerging markets, MSCI EM up around 3.1%, Shanghai 1.5%. When you get into Europe, it's interesting that DAX and the CAC, Germany and France respectively, up around 14.3% - 14.7%. [Unintelligible] up 6.5% and Nikkei Japan we can talk about that up almost 12%. Oil prices are down 7.4% year to date, copper down 6.7% and the natural gas is down almost 46% given just the excess supply that we've seen come in really related to Europe so it's an interesting backdrop for the global equity markets as of the year to date. Remember, we came into the year all of central banks were tightening. The monetary lag was going to spill in and bleed into weaker growth in the United States and overseas and particularly into earnings, but US corporations have done a fabulous job managing their way through the higher prices and the cost of labor boost productivity and the earnings season that we just closed out came in much better than expected overall. So that's kind of where we're at. The key issue when I look out say next 6, 12, 18 months is, can these gains hold? There's a fierce debate if it’s a bear market rally or is this the beginning of a new bull market? What I want to do is just kind of take it three dimensionally and look at the markets and looking forward in three different lenses - short term, medium term, and long term and what are the key focus points. Obviously, short term, say the next couple of days/next couple weeks - hopefully that's it – the debt ceiling debate. A lot of volatility, a lot of questions I know you're getting from clients. A lot of negative headlines in and around it. We were just talking pre-conference call. I think the media makes our job/your job much harder given the fact when you hear about catastrophic and the defaults and so there's a lot of misinformation in and around that that’s going to just keep the markets on edge. It's a very fluid situation. Is the X date June 1^st? Is it June 8^th? We're still working our way through that, but we know we're going to get a debt ceiling. It's going to be raised. The key question is what type of fiscal cuts, type of spending are going to come with this package? What the democrats and republicans agree on? What's it going to look like fiscally speaking for 2023 and for 2024? That's going to be a huge issue but we're not there yet. So we may or may not go into the weekend without a deal. That's going to put the pressure when we come back on Tuesday and we get closer to June 8^th date. There’s going to be more downside pressure on the markets, but remember, we've been here before. We know how this movie ends and the key question is - what are the cuts that are going to be agreed upon between both parties between now and then? Another key issue to watch when it comes to debt ceiling - I'm watching very carefully because I talked to the people in Tokyo, Brussels, London, sovereign wealth fund. Remember, foreigners own around $23 trillion dollars of US security, so they have a lot of skin in this game as well and they're asking a lot of questions. What's that mean for the dollar? The dollar's been hanging in there. Nothing dramatic moves which tells you that the foreigners are also expecting for this drama to be over sooner rather than later. So that's the debt ceiling debate. Very fluid. Probably will go through the weekend. We're going to get it done but how much drama and collateral damage comes with a post an agreement? That's the short term. The medium term is more interesting to me and I think it should be more interesting to our clients and our discussion because when I talk medium term, I'm talking about in the next say, six – nine months and there's two big focuses here. Number one is the Fed. June - July Chris Gunster going to talk more about this as well - but there's a narrative building in the markets amongst all the Fed speak that maybe the Fed goes another 25 basis points higher in June or if they pause in June, they hike in July. So there is that ongoing debate amongst the Fed in between the markets and investors about is the Fed really done? Have we reached peak terminal rates? To be decided. Remember, headline inflation 4.9%, well above that 2% target and if the Fed is adamant about getting to that 2% target sooner rather than later or extended as Ethan talks about, then that could have some ramifications for the cost of capital. The labor market remains very tight. I travel a lot through the country. Every business I talk to is still out there looking for labor and albeit not paying as much up as it was before in terms of cost of wages and salaries, but nevertheless with 3.4% unemployment rate, inflation double what the Fed target is, the Fed still very much in play when it comes to what happens next, so that's something the markets have to deal with and kind of work through in the next couple of weeks/next couple of quarters and Chris will talk to that. The other issue is the US recession. As you know, our economists are looking for the recession to begin in Q3 and Q4 into next year. Is it going to be shallow? That's the call thus far but remember when it comes to the recession call, something I want you to kind of remember and something I've been reminding clients quite a bit - recessions are not uncommon in the United States. In the post war era, we've had a dozen or so recessions and recessions to me, typically they're ways to reset, rejuvenate, and really help drive future growth. Think of recession this way – it’s not like if I go to my doctor and he says, “Joe, I'm sorry you got recession. Go home, get your affairs in order, tell your wife and kids it’s over." No, that's not a recession. Recessions are ways that we reset and get this resilient economy back on its footing. The weak go under, the strong get stronger, and we push ahead. So, I'm leaning into this recession scary talk amongst our clients because they have to realize that on the other side of this recession, say a year from now or the second half of 2024, we're going have a much more competitive economy. We always typically come out of a recession stronger in the United States and that's very unlike Japan or Europe, other parts of the world in the sense that when they have a recession, they keep the companies open, they get state subsidies, they’re not allowed the fire, and on down the line. So really what we do best in the United States is create and destroy and destroy and create. So, think of it that way. Lean into the recession talk. I'm seeing too many clients want to stay on the sidelines and fear this talk from the media not realizing that yes, they're common and two, we come out stronger [unintelligible] other end because we're so resilient. When it comes to the US economy as well, one number to keep in mind that I like to use $26.5 trillion. $26.5 trillion. What is that number? That's our total seasonally adjusted annual output GDP. There's no economy in the world as productive and resilient as ours. We have less than 5% of the world population yet we account for around 26% of global GDP. If that doesn't speak volumes about our ability to innovate and to reset and be resilient and dynamic in the face of multiple problems, I don't know what does. So, think of it that way. We're a superpower in so many industries whether it's agriculture, aerospace, entertainment, financial services, you name it on down the line. So, this economy to me is resetting post the pandemic and post the inflation problems that we've had and we're going to continue from there. Then the last part - short term, medium term, is the long term. When I say the long term, I'm really looking into the second half of this decade and believe it or not, it's coming up really fast. I think in the second half of this decade it's going to blow people away in terms of how this economy looks so much more different in terms of productivity, efficiencies, and still being the global leader that it is in all these various sectors. Just look at the AI debate, right? Who's leading that debate? The US companies are. We are. Renewables, electrical vehicles, charging stages, new bridges, roads, trains, you name it. There's a huge manufacturing renaissance coming down the pipeline with all this infrastructure spending, chips and science acts, IRA, a lot of this new dynamic capital is going to be deployed. You're going to start to see the fruits of that in the second half of this decade. What it means is more productivity, higher paying jobs, more affordability for the lower income classes. It's on down the line and I really truly believe that and I think we'll still be leading the rest of the world. The rest of will be catching up. So, think of it that way. So, kind of to wrap off kind of my three-dimensional lens. Short term - we got the debt ceiling elephant to deal with. That's going to pass very shortly but there's going to be some volatility. Medium term focus - uncertainty around the Fed and the recession call, but lean into the recession. Explain to clients what this actually means on the other side. Then long term - the second half of this decade it's going to be mind blowing in how different this economy is going to look when we get to the other side. So, what does that mean for portfolio positioning? Lauren Sanfilippo and myself wrote a piece a couple weeks ago. It's really about hard hats, hard assets, hard power. What do I mean by that? Hard hats - I'm talking about the infrastructure spending that's coming really in all 50 States, domestic and foreign production. Savita talked about this, Michael, Ethan, [unintelligible] across the whole top of the house. There’s an infrastructure spending coming here in the US for the rest of this decade that's akin to the 1950s, so think of it that way. A lot of spending coming down the pipeline, so hard hats, think industrials, anything that moves earth, digs up, shovels, you name it. Hard assets - minerals, metals, energy. If we're going to build out the infrastructure, we need a lot more copper, you name it. With EV same thing -minerals, metals. We need rare earth minerals, we need nickel, we need lithium, so we're very much still bullish on the hard assets albeit realizing some of these commodity prices have pulled back albeit the industrial side of the S&P is lagged a little bit here, but when you look further out 12, 24, 36 months, the best is yet to come. The last one – hard power. That's just the geopolitical realities of our time. The peace dividend is gone. Now it's about hard power. We see it in Europe, you're seeing it in Asia, and really if you track what's going on in Ukraine, we've gone from defensive posturing to now offensive posturing. These would be the weapons. Geopolitics between the US and China continue to boil. We'll see how that plays out, but nevertheless when you kind of step back, very much constructive on the hard power play vis-à-vis US large defense contractors. I know they've pulled back. They're going to pull back with the debt ceiling debate as well, but that's going to be an entry point for clients that do not have that exposure. So, to kind of wrap up for this week, we're looking at some significant big issues in washing the play out and they will play out. We still have in front of us the Fed June meeting and the shifting narrative towards higher rates potentially. Another rate hike we'll see. The recession call is still out there for sure, but keep in mind longer term on these pullbacks they are opportunities to invest in this great second half of this decade. As I said, it's going to be mind blowing. So that's it for my opening comments for today, May 25^th.

Operator:                   Please see important disclosures provided on this page.

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